NBFCs Current Affairs

Union Government is going to launch Rs.500 crore Credit Enhancement Fund (CEF) in July 2018 to facilitate infrastructure investments by insurance and pension funds.

The CEF provides additional source of assaurance or gaurantee that borrower will service their loan. It also helps borrower to raise loans at lower interest rates. The fund was first announced in Union Budget for fiscal year 2016-17.

Credit Enhancement Fund (CEF)

CEF will provide credit enhancement for infrastructure projects which will help in upgrading credit ratings of bonds issued by infrastructure companies and facilitate investment from investors like pension and insurance funds.

The initial corpus of the fund will be Rs 500 crore and will be sponsored by IIFCL (India Infrastructure Finance Company). It will operate as a non-banking finance company (NBFC). IIFCL will hold 22.5% stake in the NBFC, while Asian Infrastructure Investment Bank (AIIB) has been offered by the Government to pick up 10% stake.

Background

At present, only $110 billion is being invested in infrastructure in India, against requirement of $200 billion, leading many analysts to classify India as infrastructure deficit country. Most of the present infrastructure project financing is done by banking system. But all these lenders are saddled with problem of non-performing assets (NPAs). So there is need for the private sector to be more active on the infrastructure investment front. CEF will serve as alternative for rising of money for infrastructure projects through corporate bonds.

The Financial Intelligence Unit (FIU) under Finance Ministry has categorised around 9,491 non-banking financial companies (NBFC) as high riskprone financial institutions as they have not complied with stipulated provision of Prevention of Money Laundering Act (PMLA). There are about 12,000 NBFCs in country at present and high risk financial NBFCs account for about 80% of total NBFCs in the country. This list containing names of NBFCs has been updated till January 2018.

What does it means?

The publication of names of NBFCs in list is primarily to make aware public that they are not law compliant and that they should refrain from indulging into transactions with them. These NBFCs have been urged to comply with this “basic obligation” under PMLA and its rules for the past one and a half years, but to no avail. Once these NBFCs comply with the rules, their names will be taken off the list.

Background

Under PMLA, the NBFCs, which include cooperative banks, are required to furnish details about their financial operations and transactions to the FIU in a prescribed format. The FIU had observed activities of these institutions and processed the data of these companies after demonetisation of high value currency notes of Rs 1,000 and Rs 500 in November 2016. It also had found that these NBFCs also did not comply with stipulated condition of appointing principal officer and designated director who are responsible for checking and reporting suspicious transactions and cash transactions of Rs 10 lakh and above. FIU is mandated to check crimes in Indian economy and alert enforcement agencies against such.

Non-banking financial companies (NBFCs)

NBFC is company registered under Companies Act. It is engaged in business of loans and advances, acquisition of shares, bonds, stocks, debentures and securities issued by government or local authority or other marketable securities. NBFCs can make investments and lend and hence, their activities are akin to that of banks. However, they cannot accept demand deposits and do not form part of payment and settlement system i.e. they cannot issue cheques drawn on itself.